Richstar – The Court’s Powers to Dismantle Discretionary Trust Structures

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It is important to fully consider the Court’s powers to dismantle discretionary trusts before drafting such documents.  Many families invest considerable time and money into establishing a trust structure for asset protection, particularly where income earners are employed in a profession involving some degree of professional risk. However, many are unaware that in exceptional circumstances, the Courts have the power to lift the veil of protection afforded to the trust property, with particular application to receivership and family law property disputes.

Australian Securities and Investments Commission In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 (“Richstar”)

One of the leading decisions where the Court has exercised its powers in relation to discretionary trust property is the Richstar decision.

In Richstar, the Federal Court considered whether it had powers to appoint a receiver over property held by a trustee in a Discretionary Trust, pursuant to section 1323 of the Corporations Act 2001 (Cth).

Section 1323 of the Corporations Act 2001 (Cth) (“the Act”) provides for a Court to appoint a receiver over the property of a relevant person. We note that in this case, the beneficiary of the discretionary trust was the relevant person for the purposes of section 1323 of the Act.

In coming to his conclusion about whether section 1323 of the Act should apply, French J, who is currently the Chief Justice of the High Court of Australia, considered the degree of control the beneficiary had over the trust. French J also explored the concept of the trust being the “alter-ego” for the beneficiary. In coming to his decision, French J also considered the law in relation to several family law cases.

Power of Selection

In paragraph 20 of the decision, French J stated that “A trust will not be purely discretionary ‘… where the donee of the power of selection has a discretion only as to the time or method of making payments to the beneficiaries.’”

In paragraph 29 French J stated that “I distinguish the ‘ordinary case’ from the case in which the beneficiary effectively controls the trustee’s power of selection. Then there is something which is akin to a proprietary interest in the beneficiary.”

In Richstar, the beneficiary had a degree of influence over the trustee’s power to select whom payments from the trust would go towards. This degree of influence is indicative of a proprietary interest in the beneficiary.

Contingent Interest that Equates to a Proprietary Interest

In paragraph 33, French J refers to the statement of McTiernan J in Craig v Federal Commissioner of Taxation [1945] HCA 1, where contingent interest was defined as “merely the prospect or possibility of a future estate” to be contrasted with “the category of ‘bare possibilities and expectations’.”

In paragraph 34 French J stated that “A contingent interest may be described broadly as the possibility that a right of a proprietary character will come into existence at a future time if some event occurs.”

French J explored the notion that discretionary trusts usually have an uncertain scope of distribution, which may be applied to any given beneficiary. Discretionary trusts in this situation would not satisfy the definition of a contingent interest, but only one which has “an expectancy or mere possibility of distribution.”

However, French J discussed a form of discretionary trust quite unlike one that only has an expectancy or mere possibility of distribution. In paragraph 36 French J stated that “…where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because… ‘it is as good as certain’ that the beneficiary will receive the benefits of distributions either of income or capital or both.”

Therefore, where the beneficiary of a discretionary trust has an interest that gives them a high degree of certainty of distribution, the trust is more likely to be construed to be an alter-ego of the beneficiary.

French J’s Consideration of Family Law Cases

In paragraph 38, French J referred to In the Marriage of Ashton [1986] FamCA 20; (1986) 11 Fam Lr 457. In regards to the husband in that case, who was also the appointor of the family trust, French J stated that “He was found to be ‘in full control of the assets of the trust’. There were ‘good grounds for saying the trust is no more than the husband’s alter ego’… ‘In the result having regard to the powers and discretions which the husband has, and having regard to…the husband’s power of appointment and all the attributes it carries with it…’”

In paragraph 39 French J referred to In the Marriage of Goodwin (1990) 101 FLR 386, and stated that “The trial judge had found that the reality in that case was that no person other than the husband had any real interest in the property or income of the trust except at the will of the husband.”

In the above two Family Law decisions, the trust property was held to form part of the property pool for the respective family law property settlement dispute. The application of these principles from these cases can be summarised in paragraph 37, where French J stated that “…the beneficiary who effectively controls the trustee’s power of selection because he is the trustee or one of them and/or has the power to appoint a new trustee has something approaching a general power and the ownership of the trust property.”

Therefore, where the beneficiary has a high degree of control over the trust, the trust is more likely to be construed to be an alter-ego of the beneficiary.

Conclusion

Ultimately, French J ordered that that orders should be made in relation to “trusts of which the relevant defendant is the effective controller, thereby enjoying at least a contingent interest, if not effective ownership, of the trust property.”

The above principles described in Richstar, highlights the added caution that needs to be applied when establishing a discretionary trust structure.

For more information regarding the Court’s Powers to Dismantle Discretionary Trusts

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